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Microsoft & the Market Monopoly

I got in a nice email debate today, and I’ll post below the email exchange between myself and a friend. Of all my friends, she is one of the two that I truly enjoy debating. She’s a lawyer, and did her undergrad as an in economics & poli sci (I think poli sci) dual major. She was also very close to libertarianism back in her younger days, so she understands where I’m arguing from. She’s left our fold to become a pretty strong liberal, but her knowledge of economics and general pragmatic attitude generally make our debates quite productive.

I sent out an email today to alert friends & acquantances of my email address change. I’m changing for no other reason than Microsoft’s deliberate efforts to annoy FireFox users, and as a former Hotmail user, I was feeling the brunt of those efforts. In past debates, we’ve often sparred about Microsoft’s monopoly power, and monopolies in general, so she used my email as a reason to start a sparring match. Not being one to back down, I took the bait, and I think the exchange was pretty strong on both sides. When I asked her approval to post the exchange, I offered her the ability to have the last word (and unlike Bill O’Reilly, I will stand by that offer). So I don’t plan to address her final points in my post, although if my commenters would like to have a go, I may play along.

Below is the exchange. I’ve tried to clean up some of the spelling errors and typos along the way, as this was intended as an email exchange and not proofread during the debate. If I missed anything, my apologies. My comments will be in italics, and prefaced with a “B:”. Her comments will be blockquoted, bolded, and prefaced with an “R:”. The exchange is placed below the fold, as it’s quite lengthy.
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B: Due to Microsoft’s continued insistence on making life a living hell for anyone who uses a browser other than Internet Explorer, I have decided that it’s time to ditch Hotmail. Life is far too short to put up with this continued frustration. And for all of you, this should be a much easier address to remember anyway.

R: Brad, that pesky Monopoly power stinks, doesn’t it? You have monopoly or oligopoly power in one product market and use that monopoly/oligopoly power to coerce consumers into using another product (which is usually an inferior product), such as Explorer. But monopoly power doesn’t skew the proper working of the free market, no?

B: In email, I have a choice between hotmail, yahoo, gmail, and countless other free services. Years ago, I chose hotmail. Now, Microsoft’s business practices are certainly not preferred, but on my Windows system I can completely use FireFox (as my browser) and any number of those other free email services without any problems whatsoever. I’m choosing to use my own web site (which is paid hosting) so that I can have an email address ending in @warbiany.com, but that doesn’t make yahoo, gmail, and all the other clients less available or less useful.

As for an operating system, I’m running my home media PC using Linux, and considering converting my home-only laptop using Linux. I cannot do so with my work laptop, but that is only because I need access to Microsoft products on that system. Linux and the open-source movement is about 90% ready as an alternative to Microsoft, and for a techie like me, 100%. I’ll have access to free browsers, OS, office suite, and countless other products that work just as well (and sometimes better) than the Microsoft variants.

Microsoft has a lot of power in the PC market, because they made extremely smart (and sometimes shady) decisions in their business model. But the cracks are starting to surface. Microsoft is a natural monopoly, which has its downsides, but only exists to the extent that they can hold their position. They’ve been faltering lately (note the higher and higher numbers of people using FireFox because IE sucks) because their business decisions haven’t been as smart. If they turn it around, they can keep their position. Microsoft is forced to either innovate or buy competitors who innovate, because falling behind in a liquid market like software can get ugly very quickly. But you need to draw a distinction between a natural monopoly like Microsoft, which has its power because it has consistently “pleased” the highest number of customers for a number of years, and a non-natural monopoly, such as when government grant one business exclusive rights to a certain company. A non-natural monopoly is coercive, and the business granted monopoly power has no incentive to innovate, because consumers have no other choices.

Microsoft does have a significant monopoly power. But since that power is non-coercive, they’ve got a mass of snarling pitbulls snapping at their heels. Mozilla (the makers of FireFox) are taking a chunk off of them. Linux is taking a chunk. Google is taking a chunk. If Microsoft doesn’t start running faster, they’ll be in a lot of trouble.

R: Natural monoplies are a significant problem because– unlike you– most people don’t put a great deal of thought into their computer choices; and as reasonable consumers they should not. Therefore, the path of least resistance is a Microsoft operating system, with Explorer. And by default because they were really the first big comany to introduce free e-mail, Hotmail. You are assuming no coercion even though they purposefully make all their products work well together and not work well with other people’s products, because we have a choice.

Well, the market system works based on several important assumptions. Perfect competition is one of those assumptions and– as you so aptly stated– there is not even close to perfect competition in this market, because that would mean if anyone made a superior product to Microsoft’s product at the same or a lower price, then consumers would use that alternate product more than the Microsoft product. That does not happen. Therefore, there is no perfect competition; and based on the same facts, no perfect information. Those are both important assumptions to the efficient working of the market system.

People are using over-priced and under-performing products instead of the more competitive and better product. That is the problem with monopoly: inefficiency. Microsoft’s monopoly is exactly the type of monopoly that Sherman and Clayton were passed to address. I can’t wait until we have an administration that will enforce the law and ensure the proper working of our oh so important market economy.

B: Great strawman! For capitalism to be valid, we must have “perfect competition”. I’ll bet that’s what Adam Smith was talking about!

So what you’re saying is that customers would be better served if every software product they used was sold entirely separately from every other product. Microsoft should be broken up into separate companies, so that it’s a lot harder for a consumer to get a seamless, integrated system? You are underestimating the fact that Microsoft worked for years making great business decisions (as well as getting lucky in a few cases) to get to the market share they now have. And you overestimate the ability to overcome the market inertia of such a commanding market share, expecting change to be immediate.

Let’s look at another market. Let’s say I own a graphic design company. I’m doing loads and loads of business, and farming out the printing work to other companies. But I determine that if I buy a printing company, I can run the printing company at break-even levels, drop my prices to my customers, and give them a one-stop shop. They get all their printing and graphic design through me, at better prices than my competitors (design companies separate from the printing company) can possibly offer them. I suddenly start to corner the market, gaining a 90% share in my locale after a few years.

But my competitors start getting better. The design company hires talented designers in a cheaper markey (yay, outsourcing!) and can provide a superior product at lower cost. The printing company upgrades all their printing equipment, and can suddenly do it faster and cheaper than I can. But 3 months go by, and I’ve still got 88% of the market!!! What the hell happened? Other companies can do it better and cheaper, and I’m still winning!

What happened? I’ve built up a customer base that is used to dealing with me. They choose me because I’m familiar. They know me. They trust me. And I’m still a one-stop shop. But I slowly start losing market share, because price and quality are more important in the long run. I’m forced to innovate. Maybe I start outsourcing my design, and put in a capital investment into upgrading my printing equipment, so I can improve my pricing and quality. And maybe not. If I do, I might be able to hang onto high market share for a long, long time. To do so, I’ll be constantly innovating and improving. If not, however, I start losing market share. And if I don’t improve, I’ll continue losing market share.

Look at a real-world example: IBM. They were the 800-lb gorilla in computing about 15 years ago. Where are they now? Dell, Compaq, Acer, eMachines, etc have all decimated IBM, because IBM couldn’t adapt. Microsoft is currently the 800-lb gorilla in software. And they’ve got a big target on their back. Right now, they’re following right down IBM’s path of acting like a monolith that nobody can fight. And they’re slowly losing market share. It might take 5 years, it might take 10 years, but if they don’t innovate, they’ll be in trouble. They’re trying to hold their hands over their ears and scream “LALALALALALALALA” when someone mentions the idea of “open-source”. But look at history? What killed Apple as a serious computing platform? They didn’t license to other companies like the PC did. What’s killing Microsoft? They’re not innovating as quickly as the folks in the open-source movement.

Microsoft isn’t toast just yet. They’re still the 800-lb gorilla, and if they wise up, they can stay that way. But evidence of them doing so is few and far between. Right now, Linux is making serious, serious inroads. Linux is becoming a force in some of the non-computer computers like DVR’s (I’ll bet that nice DishNetwork DVR you’ve got powered by Linux, and I know the TiVo is). They’re starting to make huge strides in the server market, because they’re more secure than Microsoft. The new Macintosh OS is built on a Linux base. And geeks like me are using it, which is one of the starting points of making a more serious change, eventually penetrating the home PC market. Then, look at Google. There are serious folks out there who think that– in the future– you won’t have software on your computer any more. You’ll only have enough to get on the internet, and that things like word processing tools, etc, will all be centrally stored and you can access your data online. As an idea, it’s still in its infancy, but it’s not that far-fetched. After all, if you use Hotmail or gmail or Yahoo! Mail now, you’re already doing it. Google (and like services) may not directly compete with Microsoft, they may simply make Microsoft obsolete.

Microsoft is a natural monopoly, but I don’t consider them to be a problem. They’ve earned that monopoly position, and if they keep innovating, they will continue to hold it. They’re not innovating as much as I would like, and probably not as much as you would like, but nobody else has yet acheived the critical mass necessary to bring them down. But a few years from now, I wouldn’t be surprised to see some major changes in the computing world, as a result of Microsoft’s lackadaisical manner.

The Last Word:

R: The idea that a market economy is a better system than others is based solely on its superior ability to allocate resources to their best and most efficient use. In order to show that the market economy actually allocates the resources efficiently we look at models that assume several essential ideas. Perfect competition, perfect information, and no transaction costs are the some of the most important of these assumptions. While no real world market will have perfect competition, no consumer will have perfect information, and there will always be some transaction costs, in order for the outcomes of these markets to be efficient, there must be at least strong competition, sufficient consumer information, and low transaction costs.

Monopolies by their design as smart businesses try their best to squelch competition, reduce consumer information as to alternatives and make transaction costs as high as possible for their competitor’s products. That is the goal of business, to put competitors out of business. However, economists and anyone who studies the situation knows that once this occurs, the monopoly has no incentives to allocate resources efficiently because those important assumptions no longer exist. That is why our government passed important anti-trust and price fixing laws. We want business to do everything they can to succeed, because that is what produces efficiencies, however, once that success reaches a level that destroys those very efficiencies, the government must step in to correct the market failure.

The market system is a great system, but it does have failures (as does any system). One of those failures is monopoly. Once a monopoly is created the market does not have an efficient means of correcting the very inefficiency that it created. I am a great fan of the market system; not because it produces the morally or ethically correct result, it usually does not. What the market system does is produce the efficient result and we all benefit from those efficiencies. Those efficiencies create more for all of us. When those efficiencies are decreased a good capitalist should not argue that we should not correct the market failure because it would some how be morally wrong to take from the hard working company that created the monopoly in the first place, that is like saying that Microsoft is morally wrong for firing their hard working, but no longer needed at will employee and therefore should not be able to fire him even though it would create efficiency for the company. That may be morally wrong but is also efficient for the company. Microsoft is worried about efficiency and profit within its company. The U.S. Government is concerned about efficiency of the market as a whole. The market is not about morality, it is about efficiency. Monopoly is less efficient that a competitive market therefore it must be strictly regulated to ensure the very purpose of the free market.

If you want to argue for a moral system, lets talk about communism or socialism. You are a libertarian and you want the market, so lets call it what it is. Efficient. Lets not call it what it is not. Morally correct.

So that’s that. I’m sure there are quite a few people on both sides of the debate, so I’m definitely interested to hear what you’ve got to say in the comments.

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http://www.thelibertypapers.org Kay

It’s funny, I was just talking to my parents and sister this week about this same kind of thing – I have a love/hate relationship with Microsoft. I haven’t a problem with them as a company – other than the fact that I think they’re pricing themselves out of the marketplace. For folks like me, anyway. My situation may not be typical, but it explains – at least to me – a big part of the problem that Microsoft has. They’re in partnership with most of the computer manufacturers to offer their software package as a part of the systems (HP, Dell, Gateway, etc.) and each of those manufacturers sets up that software in their proprietary way. What it means to the end user is that while they buy computers loaded with all this software, the software is only available to them as long as that particular system is working. Once things begin to break down, it’s useless – whereas in the past, when we bought a new computer, we actually got copies of the software that we were then able to transfer to our next computer upgrade.

Not all of us can afford to buy a new computer every two years – and some of us, if we could, would be very annoyed by all the proprietary crap that comes loaded on todays boxes.

I’m personally on my third homebuilt computer in the past 6 years or so – partially because I hate having to try to tweak a proprietary system to get it to run smoothly, and partially because I can afford better components if I build it myself. But the drawback for me is that if I spend $400 in components, I then have to come up with at least that much more to purchase legal software from MS. And they’ve been so concerned with people pirating their software – why not make it a bit more reasonably priced so that those who like to put together their own systems can get it at a competitive rate? This, more than anything else, is what is pushing me towards Linux – and I daresay that I’m not alone. I believe that Linux in the next five years will be really giving MS a run for their money – which, if they (MS) will pay attention to the marketplace – will serve to make them a stronger competitor once again and between them will provide better options for consumers.

http://thelibertypapers.org/2005/11/21/who-is-eric/ Eric

Actually, Linux has already shattered the hold of the proprietary software manufacturers on the server and data center market. It has been so effective that IBM, once the king of monopoly hardware/software combinations has dived into Linux and Open Source with both feet.

The reality is that the PC market just needs one significant manufacturer to decide to pre-bundle Linux and break the MS monopoly to completely change the culture of the PC market.

Barrett

[quote]The market is not about morality, it is about efficiency.[/quote]

I disagree. Capitalism is the system of economics based on the moral principles of Individual Rights. Communism and socialism, on the other hand, is the system of economics based on the “moral” principle of equality. Socialism is fundamentally incompatable with your right to life, liberty, or the pursuit of happiness. Orwell’s 1984 is a good extrapolation of what happens to societies that hold strongly to the principle at the foundation of Socialism and Communism.

[quote]If you want to argue for a moral system, lets talk about communism or socialism. You are a libertarian and you want the market, so lets call it what it is. Efficient. Lets not call it what it is not. Morally correct.[/quote]

You know, a lot of people disparage Ayn Rand, but she recognized this type of attack on capitalism and made not merely a practical argument for Capitalism, but a moral one as well. In that vein my question to your friend is:

Socialism is moral? The system that does not recognize my right to life, liberty, property, and the pursuit of my own happiness is moral? How is that?

http://thelibertypapers.org/2005/11/21/who-is-eric/ Eric

Actually, there are some inaccuracies that pose problems.

1. Microsoft was not “the first big comany to introduce free e-mail”. Hotmail existed before Microsoft acquired them, and they were quite successful. So did Yahoo Mail, for that matter. In fact, there were significant debates among Internet users in the late 90’s over which free email platfrom was better. When the owners of Hotmail decided to cash out through acquisition, Microsoft offered them a good price, and they took it. And then Hotmail suffered for a long time because MS just couldn’t figure out how to make it work well. Many of us fled to Yahoo Mail because of the issues. Not knowing the basics of this make some of the argument quite suspect.

2. Perfect competition and perfect information are strawmen that the left likes to toss around about free markets. The argument is that if you had both then no product could ever be sold for a profit. The other half of the argument is that, since such things are not possible, there really is no such thing as a free market. Competition is, in fact, a tension between many things, including information. The reality is that the Linux market for enterprise customers is a market where “perfect information” nearly exists. Anyone can, indeed, acquire, install and maintain Linux on their server at no cost because the source code of Linux is completely open and transparent, making it essentially impossible to charge for the code. And yet ….. somehow big companies like IBM and small companies like RedHat (and even really small companies with just a few people) manage to make significant profits anyway. Why? Because there is a tension dealing with other things, like the need to meet service level agreements, the ability to bring in appropriate staff in a market where the staff are a scarce resource, and much more. Linux, in fact, demonstrates the fallacy of the strawman. I will agree that we use perfect information, zero transaction costs, and so forth to create assumptions to model what happens in a market. But this doesn’t mean that an economist (or anyone else who thinks seriously about how markets work) assumes that the real market will work that way. When we consider the impact of a gift culture built on top of a capitalist market, we start to see the reality of what perfect information might actually mean.

3. The argument that consumers shouldn’t have to know much about a computer is a strawman as well. In reality, consumers should put enough effort into choosing their product, whether it is a PC, car, book, TV, server, airplane, or whatever, as is required to ensure that the transaction is profitable for them. Each consumer decides, for themself, how much or little information they need to make the transaction. In a free market, the information is as available as possible.

All of that said, while I agree with your friend’s position on monopolies (i.e. they introduce inefficiencies and high transaction costs into markets), I disagree that markets cannot correct those things. We could point to the disruption of the Japanese auto manufacturers on the American Big 3 auto market in the late 1970’s, or the disruptive impact of Linux in the enterprise IT market from 1999 onwards, preventing an effective Microsoft monopoly in that market from occurring as evidence for what I mean. More importantly, though, it should be pointed out that we don’t clearly understand the impact of government intrusion into markets and that quite often government anti-monopoly regulation creates as many, or more, problems as doing nothing would have.

The interventionist approach assumes that a small group of people, or even one judge at times, can make better decisions for me than I can. In reality, of course, that is not true. There is another reality, as well, that interventionists are assuming that the decision makers have perfect information also, combined with no conflicting interests, and thus can make better decisions about market decisions. The reality, as the Abramoff scandal illustrates, is sadly different. Judge Collar-Kotelly cannot decide better than I can what is best for me in the PC operating system market. At best she can determine if Microsoft broke the law and should be punished for that.

Now, on to Brad’s position. Microsoft, in fact, is not a good thing for the PC market. This is a fallacious argument that assumes that standards could not have been created and enforced in the market without Microsoft dominance. I know, Brad, that isn’t exactly what you said, but it is the basis of the general argument for a Microsoft monopoly. The reality of network protocols, web servers and browsers and many other portions of the IT market demonstrate that a competitive market actually creates more effective and efficient standards that have enable public and private networks. In fact, Microsoft abandoned its own network protocols in favor of the open, non-proprietary TCP/IP protocol because of their failure to create an acceptable standard. The reality is that Microsoft’s monopoly of the PC operating system and desktop office market has created a huge distortion in both innovation and cost within those markets. When you consider that OpenOffice is about 80% comparable to Microsoft Office and available for free, you begin to realize the huge distortion in the office suite market, since MS Office Standard retails for $399. Most consumers don’t buy MS Office retail, of course. They buy it bundled from their PC manufacturer.

What many people don’t understand is that Microsoft has used financially coercive tactics to lock Dell, HP, eMachines, etc. into contracts that don’t allow them to market PC’s without an operating system, or with an alternative to Microsoft. They have done much the same with MS Office, as well. This isn’t good for the consumer. Reducing choice, and thus competition, is demonstrably not good for the consumer. In fact, MS Office came to be a good product through it’s competition with other desktop office products. Over the years since most of that competition was eliminated real innovation in the office desktop market was essentially brought to a standstill. Much as innovation in Microsoft browsers ended as soon as Netscape was destroyed as a competitor.

None of that should be taken as an endorsement of government intervention and regulation. In fact, there is good evidence that government intervention and regulation stifles competition in the market, rather than enhancing it and making the market work right.

http://belowbeltway.blogspot.com Doug

If Microsoft is, in fact, bad for the PC market, then the market will deal with it in time.

I undertand, and in some cases share, the disdain the techies have for Microsoft, but they have succeeded in the marketplace. Unless you can come up with an alternative that can beat them, don’t complain.

I’ve commented on this in another post here, and will most likely be posting on this issue myself in the coming days, but the fact of the matter is that Microsoft’s contracts with Dell, et al are not in any way coercive. They are negotiated contracts agreed to by the parties. If Dell, or Gateway, or whoever didn’t like the terms, then they were under no compulsion to agree to them.

To argue otherwise is to agree that the Sherman Antitrust Act, the most unlibertarian piece of economic legislation ever passed by the United States Congress, is a legitimate exercise of government authority. My copy of the Constitution argues otherwise.

This is the difference between a market-created dominant company (i.e., Microsoft) and a government-created coercive monopoly (i.e., the USPS, AT&T, or your local cable company).

http://unrepentantindividual.com/ Brad Warbiany

3. The argument that consumers shouldn’t have to know much about a computer is a strawman as well. In reality, consumers should put enough effort into choosing their product, whether it is a PC, car, book, TV, server, airplane, or whatever, as is required to ensure that the transaction is profitable for them. Each consumer decides, for themself, how much or little information they need to make the transaction. In a free market, the information is as available as possible.

Eric,
Here is where I disagree with you. There’s the principle of “rational ignorance”, where, for example, many people choose not to learn about politics and vote because they understand that one vote is really not worth much, particularly when all the big decisions are made in Washington rather than locally. Consumers, according to you, “should” put enough effort into acquiring information to make the transaction profitable.

I think this certainly applies to computers. But not in the way you’d imagine. An average computer user simply doesn’t care. They’re quite happy, as Doug has pointed out, using the PC the way the manufacturer has set it up. Therefore, the amount of effort to even consider Linux probably isn’t worth the licensing fees that are part of the cost of that machine. The transaction to them is more profitable as a thoughtless transaction which gets them a “good enough” WinXP box at $50 more money than if they spent their time and energy learning about it. As you rightly point out, we won’t see a serious change in the home market until one of the major PC manufacturers (probably someone smaller like eMachines or Compaq) decides to start pre-loading linux. At that point, some people will use Linux, which will be whatever was decided “for them”, and probably because those machines will be the least expensive. That day is probably coming, as Linux matures and PC manufacturers decide they’d rather save the licensing fees they’re paying Microsoft. They currently weigh the increased volume of tech support staff needed to transition to Linux against the Microsoft licensing fees (among other factors, such as the social stigma of Best Buy employees telling consumers “well, Windows is probably easier, but Linux is cheaper”), and the balance hasn’t tipped yet.

I’ve pointed out elsewhere that when it comes to my wardrobe, I’m the same way. I wear what’s in the closet. If my wife (or family around Christmas-time) works to replenish that closet, all is fine. I don’t particularly care what’s in there, because I know so little about fashion that the cost of taking an active interest and learning about it is more than I’m willing to expend. As long as I’m wearing moderately normal close in moderately good condition, I’m quite happy with the deal. I could dress better than I do, and to some extent, enjoy wearing nice clothes. I just don’t consider that enjoyment to be worth the added time and hassle of shopping for them.

http://thelibertypapers.org/2005/11/21/who-is-eric/ Eric

Doug, if I threaten your livelihood if you don’t agree to do what I want, have I coerced you? What if I threaten your livelihood, plus that of the 10,000 employees who work for you? Not all coercion involves the government monopoly on the use of force. This, I think, is one of the great fallacies of libertarian thinking. That doesn’t mean that the immediate thinking is that the Sherman Antitrust Act is a good thing. Doug, that’s a fallacy, you’ve created an either/or situation that assumes if I don’t agree with you, then I must follow some other hypothetical set of thinking.

http://thelibertypapers.org/2005/11/21/who-is-eric/ Eric

Brad, the much longer paragraph you wrote is the point I was making. I wasn’t disagreeing with you. I was pointing out that the idea that a consumer should not know much about computers is a strawman argument. That argument is used to ignore the fact that each consumer learns as much about computers as they feel is appropriate for them to have a profitable transaction. That argument is not being made to suggest that the average consumer should have to do anything. Instead, the argument is that they will learn as much, or as little, as they feel is appropriate for them.

http://belowbeltway.blogspot.com Doug

It depends on what you mean by coercion.

Do you mean Vito Corleone sending out Luca Brasi to make an offer I can’t refuse ? Or do you mean Microsfot saying that they will only agree to contracts with certain, admittedly restrictive, terms in them ?

If its the first, then its blackmail and possibly attempted (or actual) murder, its illegal, and it should be.

If its the second, then I don’t see what’s wrong with it. Microsoft, like any other company, has the right to say that it will only deal with other companies on certain terms. Those companies, of course, also have the right not to agree to those terms. What they don’t have the right to is the “right” to have their cake and eat it too — they can’t force Microsoft to deal with them under terms that Microsoft doesn’t agree to.

Yes, its true that if I decide not to do business with your widget company then it could mean the end of the company and unemployment for 10,000 employees, but you don’t have the right to force me to do business with you to begin with.

The situation is different if you’re talking about the state, of course, which is usually the primary source of illegitmate coercion.

http://thelibertypapers.org/2005/11/21/who-is-eric/ Eric

Doug, just because I have a choice doesn’t make your actions moral. This is demonstrated very simply. When the government tells me I must pay taxes I have a choice. I can obey, or disobey. By your argument, since I have a choice, it’s okay for the government to use the threat of force to get me to do what they want. You are trying to have your cake and eat it too. And you still aren’t addressing my point. You’re just waving your hand in the air and making magical choices appear. Economists, even very libertarian economists, don’t agree that all collusion and coercion is okay as long as it is not by government fiat.

http://unrepentantindividual.com/ Brad Warbiany

Eric,

Microsoft’s not threatening to burn down their factories. Microsoft is saying “if you want to work with us, here are the terms we’ll agree to”. Let’s say you’re trying to hire an employee. They tell you “I want $200,000 a year to mop floors for you, or you don’t get my services”. Is that coercion?

I’ll admit that Microsoft “forces” PC manufacturers into exclusive contracts. If those PC manufacturers choose another route, they might feel some pain, yes. Or they might break the monopoly. The easiest way to break a monopoly is when the monopoly power is asking for far too much, because that is when they’re most vulnerable to competition.

But exclusive contracts are the way of the world. I work for a company who has our own internal sales force, as well as working with distributors and rep firms. What does every rep firm want? An exclusive contract. That means that they’re the only rep firm we’ll use in their territory. Obviously we don’t want to give out those contracts, but for the better rep firms, it’s worth more to us to use an exclusive contract than to have those firms competing with us selling someone else’s product.

http://unrepentantindividual.com/ Brad Warbiany

Doug, just because I have a choice doesn’t make your actions moral. This is demonstrated very simply. When the government tells me I must pay taxes I have a choice. I can obey, or disobey. By your argument, since I have a choice, it’s okay for the government to use the threat of force to get me to do what they want.

Eric, I consider this to be a false analogy. This analogy would only hold true if you agreed that government is the provider of our freedom, and that if we don’t play by their rules, they will cease to “provide” freedom to us. I don’t think you’d be willing to admit that government is a provider of freedom. At best, it is (ideally) a protector of freedom, but throwing someone in jail is an active attack on freedom, not a withdrawal of protection.

Microsoft isn’t taking away anything from a company if they choose not to do business on Microsoft’s terms. They’re only refusing to engage in a transaction. The analogy you’re drawing would only make sense if Microsoft then went out, say, lobbying the government to shut down that company, or went around slandering the company for failure to play by Microsoft’s rules.

http://belowbeltway.blogspot.com Doug

Eric,

Who decides what is moral ? Is it moral for the state to say that Microsoft doesn’t have the right to dictate terms to contracts that nobody is forced to enter into ? To my mind, that is no more moral than it would be for the state to say that I as an individual don’t have the right to enter into a contractual relationship with a person of my choice. They are, in fact, the same thing.

The question of whether it is acceptable for the government has the right to use force to threaten the use of force (or denial of liberty) depends on the end it is aiming to achieve. It is the ends, not the means that determine the morality.

I’m not sure what you mean when you say I haven’t addressed your point. I think its pretty clear that the coercion of the Mafia is fundamentally different from any “coercion” that Microsoft, or any other company, may use when saying that there are only certain terms under which they will do business with me. The first violates my rights. The second does not.

Finally, I’m not magically creating choices, as Brad points out, the choices are there. PC manufactures may not like the terms of Microsoft’s exclusive contracts, but they had the choice to agree to them or not. The alternative may be difficult and, in the end, an impossible route for them to succeed, but that doesn’t mean that they have the right to dictate to Microsoft the terms by which it can do business.

Let me ask this question, if we weren’t talking about Microsoft, would your feelings on this issue be any different ? What about the exclusive contracts GM, Ford, and pretty much any other auto manufacturer has with dealers and suppliers ?

http://unrepentantindividual.com/ Brad Warbiany

That was a bit unclear…

To draw the analogy of the government: To be a correct analogy, the government would have to tell you that if you don’t pay taxes, the police won’t protect you, the fire department won’t protect you, you can’t send your kids to public schools, the courts won’t enforce your contracts, etc. You are talking about the “services” those taxes provide, and they can take those services away. Granted, you might be in a world of trouble, and get taken advantage of by everyone in the world, if you didn’t have the courts to uphold your contractual agreements. You might have to hire your own security services, and live like an an-cap.

But they add an additional threat: the threat of throwing you in jail. That is where the analogy fails, because Microsoft doesn’t have that power. Microsoft can’t take your freedom away, they can only withhold their services. If their services are so compelling that you feel you truly need them, it will seem like they’re “forcing” you, but they’re not.

http://thelibertypapers.org/2005/11/21/who-is-eric/ Eric

Brad, the real world is both more, and less, complex than you are trying to make it in your arguments here. You are also ignoring real and artificial scarcity. Are you the only company that provides your product (or its equivalent)? Are you creating artificial scarcity through your exclusive contracts?

http://thelibertypapers.org/2005/11/21/who-is-eric/ Eric

Both of you have argued, many times, that morality is centered around individual rights to life, liberty and property. If another individual threatens my property, you have both argued that the government should intervene to prevent that. Why, suddenly, is it different when it is Microsoft threatening Dell’s property? It feels to me like it is because you think, incorrectly, that I am arguing that the government should intervene. In fact, the opposite is true. I think that much of the ability of a company to create a monopoly is created by government intervention in the market. Including Microsoft’s ability to create a monopoly. I also get the impression that you oppose the idea that non-goverment monopolies are bad things because the left likes to use the government to break them up. But that’s a premise that assumes that this is an either/or proposition with no “third way”. The truth is, you can be opposed to monopolies and to government regulation of monopolies, which I am.

http://unrepentantindividual.com/ Brad Warbiany

It depends on what the meaning of the word “is” is, doesn’t it. Is Microsoft “threatening Dell’s property”?

Let me ask you a question. Dell is a major PC manufacturer. I don’t know the numbers, but my *guess* is that they’re the largest in the world. Dell has quite a few engineers on staff, including software engineers. What would happen if tomorrow, Dell said they were transitioning all of their systems to Linux. They’d like to offer both, but Microsoft won’t let them, so they’ll preload Linux and pass the savings on to customers. They’ve got enough software engineers at Dell that I’m sure they’d put together a system just as usable as the preconfigured Windows systems, and a heck of a lot cheaper.

Dell has the market size to make a change like that. And what would the IMMEDIATE response be from Microsoft? They’d renegotiate their contract with Dell so that they’d still get loaded on some systems. Maybe they’d renegotiate so that Dell would continue putting Windows on home/business systems, and Linux on servers. Or maybe they’d change their pricing structure to offer better pricing on Office & XP Pro. Or any number of other situations. Microsoft needs Dell’s revenue just as badly as Dell needs Microsoft’s operating systems. Microsoft would be quick to change their tune if someone with any sort of heft challenged them on this. And if they weren’t quick to change their tune, they’d lose market share, which they cannot afford to do, because it jeopardizes the power base they’ve built.

Now, it’s not likely that someone the size of Dell would do that. After all, they already have such huge volumes that they’re getting much better licensing costs from Microsoft than any other manufacturer, so they continue selling in volume. And the switch would have high transition costs, so it’s better for them to stay where they are.

But not so for eMachines, or Compaq, or Acer, or the other “small” manufacturers. They’re not getting the good pricing from Microsoft, and they’re small and nimble enough that they could position themselves as a “niche” brand based on Linux.

So where is the “coercion” again?

http://belowbeltway.blogspot.com Doug

Eric,

If a monopoly comes about because of the operation of market forces, then I fail to see what’s wrong with it.

As Brad pointed out above, economics teaches that a monopoly that becomes lazy can be subject to upstart competitors because it becomes too reliant upon its existing monopoly and fails to innovate. Though not true monopolies, this is what happened to IBM, Digital, and other heavyweights of the mainframe era who found themselves pushed aside by the PC. As long as there are no legal barriers to entry, there is always the possibility that someone will come along and knock the king off his thrown. Sometimes that king is able to reinvent itself, like IBM did. Other times, it just fades away. It has happened before, and it will happen again.

The problem comes in when there is a “monopoly” created not by market forces but by government fiat. The classic example of this, of course, is the post office. Even if FedEx and UPS wanted to compete with USPS in the delivery of first-class and bulk rate mail, they are forbidden by law from doing so. Until recently, local telephone companies, electric companies, and gas companies also had a legally protected monopoly in the delivery of their services. Cable television is still a monopoly in most local jurisfictions. In those situations, the king can’t be deposed because the state forbids competitors from even existing.

I don’t make a judgment as to whether or not a market-created “monopoly” is a good or bad thing, it just is. If one exists, and it operates within the bounds of the law, then I don’t see that its any business of mine to make a judgment as to whether or not it is moral or not.

I don’t have too much to add to the Microsoft-Dell argument that Brad hasn’t already said, except this (and its something I’ve said several times today; Microsoft saying that it will only do business with Dell under certain conditions does not constiitute threatening Dell’s rights or property. Telling Microsoft that it doesn’t have the right to do business on its own terms, does violate Microsoft’s rights and property.

Finally, accepting for argument’s sake that there is something morally wrong with monopoly regardless of how it is created, what is it that you propose be done about it ? In the end, the only thing I can see happening is state involvement to break that monopoly up.

http://www.thelibertypapers.org/ Eric

1. Scarcity is a factor you are ignoring.
2. The coercion (and threat to Dell’s livelihood) didn’t occur yesterday.

You are applying technology of 2006 to try and undesrstand something that occurred in 1998. You are also ignoring the potential for collusion (if you can’t beat ’em, join ’em). And, you still haven’t dealt with why it is immoral for Brad to threaten my life, liberty or property directly but just fine for a company to do so directly with another company or indirectly with individuals.

http://unrepentantindividual.com/ Brad Warbiany

Scarcity? We have Microsoft and the PC world. We have Mac (and MacOS will start working on x86-based PC’s soon). We have Linux, which is completely cross-platform. So there are numerous possible choices. That, coupled with the fact that software, by it’s very nature, is not a physical good subject to scarcity, and I fail to see the point. You may make the point that we don’t have many *viable* alternatives to Microsoft, but all the posts you keep showing at Eric’s Grumbles makes me think you believe Linux is a viable alternative.

And you haven’t yet justified your use of the term “threat” to describe what Microsoft is doing if they choose not to behave on the terms you want them to. If I offer to sell you a computer, but only if you agree to only do certain things when you use that computer, am I being coercive? Even if I’m the only computer retailer within 1000 miles? Even more to the point, am I threatening your life, liberty, or property, if I choose not to sell on your terms?

Last, though, I will agree with you that it’s quite possible Microsoft’s market position was improperly aided by government action and protection. And if that is the case, I do believe that is wrong and should not have occurred.

http://belowbeltway.blogspot.com/ Doug

What does scarcity have to do with anything ? Microsoft isn’t the only company in the world that has exclusive access to a product that alot of people want.

And it doesn’t matter when the so-called coercion occurred. Dell didn’t have to agree to the terms and Microsoft had every right to insist upon them if it could get Dell to agree to them.

>>you still haven’t dealt with why it is immoral >>for Brad to threaten my life, liberty or >>property directly but just fine for a company to >>do so directly with another company or >>indirectly with individuals.

It does matter when the coercion occurred because the factors driving scarcity in the PC market were different in 1996 and 2006.

http://belowbeltway.blogspot.com Doug

Scarcity is a fact in every market, so I’m not quite sure what that means in this context.

You appear to be contending that Microsoft’s dominance in the OS market somehow distorted the market and prevented the development of competing operating systems, and that that is a bad thing. Am I correct ?

This, I think, is where we disagree. I don’t think you can characterize a particular market outcome as good or bad, it is merely the reflection of consumer choice and apparently superior business skill (and arguably bad business decisions by the likes of Apple, Corel, etc that allowed Microsoft to become more dominant that it otherwise might have been) on a mass level. Is it good or bad that Windows is so dominant ? Who knows ? If it weren’t for a mass commodity like Windows the PC marketplace over the past 10-15 years would have been very different. The PC is a consumer commodity now, not a techie tool, and most consumers are, apparently, happy with the decision that Dell made to ally itself with Microsoft.

I will address this later today, but I would submit that Microsoft does not even qualify as a monopoly under the traditional economic definitions. That notwithstanding, its dominance in the marketplace is, from a libertarian point of view, neither good nor bad, it just exists, at least until some upstart comes along and changes the playing field.

http://thelibertypapers.org/2005/11/21/who-is-eric/ Eric

Check my post on scarcity to see what I’m saying. I don’t make a “good or bad” argument in that post, I just explain whether the operating system and OEM market is natural or artificial scarcity.